INVESTING

INVESTING; What's the Worst Place To Keep Art? A Portfolio

By Allen R. Myerson

Published: August 28, 1993

Correction Appended

WITH the Dow industrials, the S.& P. 500, the Nasdaq composite, the 30-year bond and virtually every other benchmark hitting records this week, only a contrarian would even think about collectibles. They have been among the most disheartening investments of recent years, down there with commercial real estate and Charles Keating's junk bonds. Everything from modern art to antique cars to ancient coins has crashed, and these disinflationary times favor no recovery.

But for someone hankering for a Greek decadrachm or a shimmering Degas, is now finally the time to buy? Not as an investment, now or ever. True art lovers might find value in some categories never swept by global bidding wars. But many people who had peddled art or antiques as investments have withdrawn.

Merrill Lynch won't even comment about the $25 million Athena II ancient coin fund sold to investors in 1988. The fund's coin inventory will be liquidated by Sotheby's this fall. What does Merrill think of investments in art and other collectibles now? Nobody at Merrill still follows the stuff.

Few conditions favor a revival in tangible investments of any sort. Inflationary fears are on the wane, as this week's renewed bond rally confirmed. Gold, regarded as an inflation hedge, continued giving back its recent gains.

High inflation causes a flight to the tangible, which can hold its value better than the money, equity or debt that exists mainly as paper slips or electronic blips. Stable or lower costs are now having the reverse effect. "The most important trend in the system is deflation," said R. S. Salomon Jr., chairman of Salomon Brothers Asset Management. "That's not likely to change any time soon."

Years ago, Mr. Salomon himself began collecting French glass paperweights from the mid-19th century, often for $500 or $1,000 each. By the late 1980's, Japanese buyers, passionate for all things French, moved in. "Then they were $20,000, and they were no longer so much fun anymore," Mr. Salomon said. In the last few years, he said, the Japanese have exited and prices have come down, but not far enough to tempt him.

The most expensive art has also been the most volatile. Since 1989, Impressionist art is down by half, modern art by more than a third, according to Sotheby's 1992 indexes. Some more moderate categories, including furniture, have been more stable. In a few specialties, like Latin American art, prices are still becoming as swollen as some of Fernando Botero's painted figures.

Price indexes and comparisons of past and present auction results, however, far overstate investors' returns. Items that fail to sell aren't reliably included, as if the Dow could be juiced by excluding I.B.M. The indexes seldom account for security, insurance, maintenance, capital gains taxes and daunting transaction costs.

The auction houses raised their buyers' fees by half, to 15 percent, early this year on the first $50,000 of any lot. Sellers' charges are typically 10 percent but can be negotiated down. Markups at dealers are far higher. Who would ever plunge into the stock market if commissions and spreads on 100 shares of a $50 stock cost a minimum of $1,250?

Mr. Salomon proposes a better gauge: Sotheby's stock. After a terrific run-up in 1989, the company's stock (ticker symbol BID) plunged even farther than its merchandise. Since the end of 1988, Sotheby's has failed to deliver even half the returns of the Standard & Poor's 500.

Collectibles simply defy financial analysis. No income statements or balance sheets. No cash flow, interest payments or dividend streams. It's as if all these elements were stripped from stocks or bonds, leaving pure investor sentiment. Few collectibles have much intrinsic value beyond what someone else would pay. Making technical judgments about originality or skill can be even more chancy than picking among biotech companies with no products.

If most money managers can't match market benchmarks, why should art investors do any better where value is even less tangible? As William J. Baumol, a New York University economist, suggests, only critics who can redirect public tastes can readily profit from their judgments.

From centuries of auction data, Mr. Baumol found that the average gains from art outpace inflation by about half a percentage point -- falling a couple points behind what investors could earn from low-risk bonds. In other words, he says, the annual cost of esthetic pleasure averages about 2 percent of an object's value.

It's no surprise that art has lagged behind other investments, he says. If paintings had the same payoff as stocks and bonds, who wouldn't rather have the art?

The chance to conspicuously consume has brought some fleeting pleasure to the likes of Martin Sorrell, Alan Bond and other profligate buyers and, more recently, sellers. But the intangible benefits of tangibles flow primarily to true art lovers.

A 1989 study of the long-term appreciation of Stradivarius violins found that a mere investor -- after insurance and, in some countries, capital gains taxes -- would have dismal returns. Someone who enjoyed playing a rare fiddle would receive much greater value. Possibly some monetary value as well, as in the case of, say, Itzhak Perlman's Guarneri.

Any buying opportunities that now exist in art and other collectibles are for those who truly enjoy their purchases. "For Philistines who derive no esthetic value from ownership of a work of art but who nevertheless chose to buy one purely for financial gain," Mr. Baumol has said, "the pecuniary punishment can be expected to fit the crime."

Correction: September 11, 1993, Saturday The Investing column in Your Money on Aug. 28, about the problems of investing in art and other collectibles, referred incorrectly to the activities of Martin Sorrell, chief executive of WPP Group P.L.C. Mr. Sorrell does not invest in art.